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Microtransactions, Explained: Here's What You Need To Know

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A primer.

The topic of microtransactions dominated the headlines of video game news in the second half of 2017. EA's Star Wars Battlefront II was a shining example of things going wrong, with a developer pushing too far and ultimately needing to apologise and reverse course. Battlefront II reignited the conversation around microtransactions, including loot boxes and other systems. But what are microtransactions, how do they work, and where are they going? To help make sense of the matter, we've put together a primer of sorts to help you understand the basic definitions, context, realities of why microtransactions exist, and more.

What Are Microtransactions?

There is no one catch-all definition for microtransactions that perfectly encapsulates and represents the term. But generally speaking, a microtransaction is anything you pay extra for in a video game outside of the initial purchase. For example, Activision's Call of Duty series offers microtransactions in the form of in-game currency called Call of Duty Points for extra items like weapon camos. Overwatch sells Credits that you can use to purchase cosmetic items. The FIFA franchise sells FIFA Points for Ultimate Team.

The name derives from the fact that, oftentimes, a microtransaction purchase is small in price and function, typically no more than $10. Lower-priced microtransactions in the range of 99 cents to $10 may make up the bulk of sales, but it's not the only option. Many games, on console, PC, and mobile, offer "micro" transactions that cost up to $100 or in some cases even more.

Microtransactions are extremely commonplace in video games today. In fact, it is often more newsworthy when a game does not have microtransactions. But not every game handles them the same way.

Why So Controversial?

The word "microtransaction" oftentimes conjures up memories of the worst, most player-unfriendly applications of the business practice. Just recently, EA found itself in hot water because Star Wars Battlefront II was set to allow you to purchase loot boxes with real money. These loot boxes can include items and abilities that actually affect gameplay, so some gamers saw this as a move towards a pay-to-win scenario.

The idea is that if you paid enough money, you could eventually acquire weapons and upgrades that would give you an advantage on the playing field. This was obviously met with a huge amount of criticism, and EA decided to pull the plug hours before launch. Microtransactions are coming back to Battlefront II, but it remains to be seen in what form.

Blizzard's popular hero shooter Overwatch allows players to purchase loot boxes with real money as well. But the big difference is that those loot boxes only contain cosmetic items--that is, items that do not affect gameplay in any manner. Another element at play is the difference between microtransactions in full-priced games versus free-to-play titles. For free-to-play games, the business model is entirely dependent on people spending money on microtransactions, so microtransactions are expected. That's typically the only way they make money.

Epic's new Battle Royale game Fortnite: Battle Royale is a free download, but you can spend money on all manner of cosmetic items such as emotes and skins to customise your character. None of these items affect gameplay. Some developers will make the argument that free-to-play, as a business model, is the most democratic because if the developer doesn't create content that's compelling enough, people won't spend money and the game will fail.

Some say it is icky for big-budget, AAA games to ask for more money beyond the initial sale price, which can be $60 or more depending on where you live and what you're after. Developers like Ubisoft and Activision will point out that microtransactions in games like Assassin's Creed Origins and Call of Duty: WWII are completely optional, and because they do not impact gameplay--or, if they do, are limited to single-player--they don't affect balance or the general integrity of the game. If you want armour for your horse, buy it. Want a weed camo skin for your gun? You can buy it. Being able to craft a character that is uniquely you is part of the appeal of many games today. The issue for some is that games now offer the ability to buy content that, in the past, might have been included right away. Publishers might counter that the price of games has not gone up, despite inflation and rising development costs.

Legislative Action

In the wake of the controversy around Star Wars Battlefront II, lawmakers and regulatory bodies from around the world are taking a closer look at loot boxes to decide if action should be taken. The principle directive among these people and groups is to determine if loot boxes--which offer up a random reward--constitute a form of gambling. And if they are deemed to be a form of gambling, that could mean they are subject to the same or similar restrictions as casinos and the lottery. The idea is that you would have to be a certain age to buy a game with loot box mechanics.

A state representative from Hawaii has already submitted multiple bills into his local legislature in which he voiced his concerns about loot boxes and proposed that a law be enacted that bans the sale of video games with "gambling-like mechanisms" to people under the age of 21. This could be a landmark piece of legislation. While if it became law it would only apply to games sold in Hawaii, it could set a precedent for other states and countries to follow. Indeed, lawmakers in Indiana and Washington have put forth bills with similar language, while US Senator Maggie Hassan (D-NH) has called on the ESRB to review its practices and policies surrounding games with loot boxes.

In response to this request, the ESRB just recently announced that it will introduce a new label on some games with microtransaction systems. The overall goal is to inform consumers--and in particular, parents--about which games offer a way to spend additional real-world money from right within the game itself, but whether it will be effective is unclear. The ESRB's new label, which will read "In-Game Purchases," will be located near the rating category (E for Everyone, M for Mature, etc.) but will not be housed inside the same box as content descriptors (Sexual Content, Comic Mischief, etc.). The ESRB expects games to begin arriving in stores with the new label in the "near future." This will coincide with the launch of a new website intended to inform parents about the ESRB's ratings system, how in-game purchases work, and how to use parental tools to control what and how children play games. The new label will offer no specifics about the type of in-game purchases available so as to avoid overwhelming parents with too much information, the ESRB says.

The Entertainment Software Association, which lobbies on behalf of the video game industry, has a different idea. It would rather see self-regulation by video game groups like the ESRB than the kind of government-mandated changes that the lawmakers are proposing. This reaction is understandable, as a law that would, even in some small way, limit the sale of video games is not something that the ESA would so easily or willingly get behind. It is important to note that while legislation motions are in action, it is in the very early stages, and statistics show that the overwhelming majority of bills never become law on a state and federal level. Still, there is a discussion to be had on the topic, and it is a healthy one. In China, regulators have mandated that games with loot boxes clearly and transparently disclose odds--and games like Overwatch are compliant.

What Analysts Are Saying

Microtransactions are a relatively new addition to the video game business model. Video game analysts, who analyse trends and report back to clients to help them make investment decisions, generally agree that microtransactions are here to stay. Daniel Ahmad, who works for Niko Partners, said as much earlier this month when commenting on Activision Blizzard's $4 billion in microtransaction revenue in 2017. "It further goes to show that add on content such as DLC, Season Passes, Microtransactions, and other post-launch monetisation content is becoming increasingly accepted and desired across console and PC, just like it has been on mobile for some time," he explained at the time.

Why Do Developers Use Microtransactions?

The first and most obvious reason is that microtransactions have proven to be hugely and consistently lucrative. Almost every major video game publisher now reports microtransaction revenue; Activision Blizzard reported $4 billion in revenue from microtransactions in 2017 alone. Ubisoft said in a recent earnings report that digital add-on content is highly attractive because it can be produced quickly and cheaply. Not only that, but any form of digital sale is highly attractive to publishers because the margin ratios--that is, the difference between what the item costs and how much it costs to produce relative to revenue and profit--are excellent. There is no physical box to sell for a microtransaction.

Even with platform holders like Sony and Microsoft taking their usual 30 percent cut, microtransactions make a lot of money for publishers. Almost every major publisher that discloses microtransaction revenue has reported year-over-year increases, so you can expect publishers to continue this effort going forward. Take-Two, whose labels include Rockstar and 2K Games, has said it wants to have some form of "recurrent consumer spending" in every game that it makes. And that would include this year's highly anticipated western, Red Dead Redemption 2.

Microtransactions are also attractive to publishers because, as video games become more expensive to produce, revenue from microtransactions can help offset the development cost of the main game. The price of a full-priced game went up from $50 to $60 during the Xbox to Xbox 360 and PS2 to PS3 transition, but no such price hike happened in the next generation. Developers like Ubisoft are now releasing fewer games but supporting those titles for a longer period of time with new content, some of which is paid. As an example, Ubisoft shipped Rainbow Six Siege in 2015, and instead of making a sequel, the developer plans to use the games-as-a-service model to support the game. The developers of Rocket League and PUBG are following a similar trajectory, and you can expect other games and franchises to follow suit in the future.

What's The Future For Microtransactions?

Every major publisher in video games is already investing in microtransaction systems, and as mentioned, they bring in lots of money and at a high margin. You can therefore expect microtransaction systems to continue to exist and grow in ubiquity. Some publishers are saying the right things, like EA, whose CEO Andrew Wilson is promising that microtransactions need to feel "right" and player-friendly. Ubisoft said the same thing recently when questioned about loot boxes and microtransactions in Rainbow Six Siege. The game's brand director made the case that Ubisoft's golden rule about loot boxes is that the items they contain should never impact gameplay in any way whatsoever. What happens in practice at EA, Ubisoft, and other publishers remains to be seen. But what is clear is that microtransactions are here to stay.

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Eddie Makuch

Eddie Makuch mainly writes news.

Star Wars Battlefront II

Star Wars Battlefront II

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